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Boston Properties (NYSE:BXP)

Q2 2011 Earnings Call

August 02, 2011 10:00 am ET

Executives

Douglas Linde - President of Boston Properties Inc and Director of Boston Properties Inc

Arista Joyner - Investor Relations Manager

Michael LaBelle - Chief Financial Officer, Senior Vice President and Treasurer

Mortimer Zuckerman - Co-Founder, Chairman, Chief Executive Officer, Head of Office of the Chairman, Member of Special Transactions Committee and Member of Significant Transactions Committee

Robert Pester - Senior Vice President and Regional Manager of San Francisco office

Raymond Ritchey - Executive Vice President, National Director of Acquisitions & Development and Member of Office of the Chairman

Analysts

Jonathan Habermann - Goldman Sachs Group Inc.

James Feldman - BofA Merrill Lynch

Jeffrey Spector - BofA Merrill Lynch

Steven Benyik - Jefferies & Company, Inc.

Michael Knott - Green Street Advisors, Inc.

Chris Caton

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

Ross Nussbaum - UBS Investment Bank

Michael Bilerman - Citigroup Inc

Srikanth Nagarajan - FBR Capital Markets & Co.

David Harris - Gleacher & Company, Inc.

Robert Stevenson - Macquarie Research

Operator

Good morning, and welcome to Boston Properties' Second Quarter Earnings Call. This call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Arista Joyner

Good morning, and welcome to Boston Properties' Second Quarter Earnings Conference Call.

The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Monday's press release, and from time to time in the company's filings with the SEC. The company does not undertake the duty to update any forward-looking statement.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well.

I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Mortimer Zuckerman

Good morning, everybody. Thank you for joining us. We're happy to have the opportunity once again to update you on both the company and the environment in which we are working.

As for the environment, as you know, the national economic numbers have really deteriorated in the last several weeks, particularly when we found out how bad the first and second quarters were in terms of GDP growth. And if the numbers are correct, it's now 0.4% for the first quarter and 1.3% for the second quarter, an average of 0.85% but that assumes it's an annual growth. So in the first quarter, for the past year looking at a growth rate of about 0.4%. And needless to say, this is on the verge of perhaps looking into a double dip recession. It's certainly doesn't look promising. The unemployment numbers are very, very bad. The housing numbers are bad. And the consumer confidence numbers are bad.

However, what is, I think in the sense, relatively very good are the commercial office buildings in major cities, particularly the cities that Boston Properties [audio gap], not by accident of course, focused on and focus in. So I think that we have a substantially strong story to describe to you, and we think this is going to continue over the next several periods and nobody really quite knows what the effect of presumably being agreed in the Congress, but it's certainly going to have a sort of downward pressure in the short run on the economy because it's bound to reduce government spending. Most of the deficits which they are talking about were extended into a later part of the year. But the first half of the year is so weak that you can imagine that everybody is looking at what's going to happen with the government "stimulus" and seeing that this isn't going to be nearly as strong as they like, and it's going to continue to get weaker, although it's nowhere nearly enough to really get our deficit spending under control.

Nevertheless, the economy is weak enough that we think the interest rates, by and large, will stay fairly, fairly low for quite a period of time. And in a sense, this has helpful to companies like Boston Properties, which are so capital intensive and do so much financing. And I think that Doug and Mike will give you some better feel for it, but I think this is going to be a continued opportunity for us in the form of either financing or refinancing of the existing buildings during the -- of the company, and it will give us a chance, we believe, to continue to be active in looking for assets since we are in a position to finance them if necessary just out of our own financial strength.

And that gives us a degree of confidence in our approach and gives us a solid degree of confidence in our ability to grow. And so we should have some opportunities coming up. But these are always unpredictable, and we're always looking for certain properties, certain kinds of good properties that are the ones that both are the most valued today. You probably all are aware that the pack rates for buildings now have really been transformed over the last year and a lot of money is flowing into this kind of category of buildings in certain markets. We're in the market that everybody wants to be in, and we have the buildings that everybody wants, but do we want to sell, because that's not what we want to do. We thought that we aren't prepared to look at some of our assets and if necessary, we decided that it makes sense to dispose 1 or 2 of them. But we're essentially looking to see if we can acquire buildings and develop buildings that will be consistent with the quality of the kind of real estate that we have accumulated -- in the markets that we have accumulated. So that's sort of where it is. In the sense, it's a way of saying we think our estimate of the overall economy which should probably be more pessimistic in most people for quite a long time remains fairly pessimistic. If anything, I think that's the stimulus program is going to run out of gas sometime within a matter of 1 month or 2.

Monetary policy has been very, very stimulative. And in the context of the most stimulative fiscal and monetary policy in the history of this country, we are still not making much progress in terms of our GDP growth or turning the economy around so that it begins to grow in and of its own dynamics. And, of course, look at the housing market which continued to soften and the unemployment figures which continue to get away. It just tells you that we're into a particular kind and situation that is certainly unique. I mean, it is not something that we have seen, and it is due to the incredible financial deleveraging that still takes place and is taking place in the economy, particularly on the consumer side but also, you have it in state governments having now to really, really, now that the money that they've got the federal government in which evaporated, they're going to be under great, great pressure.

So nobody quite knows, this is an unprecedented situation, therefore unpredictable, but there is always economic activity within the context of whatever the overall macro dynamics are, and we think we're going to be in a position to not only do well with our existing real estate in which we will describe to in a moment, but we're going to continue to be active in looking for additional acquisitions. I'll stop there and turn it over to Doug.

Douglas Linde

Thanks, Mort. Good morning, everybody. Happy summer. We -- when we got together with a number of you at the NAREIT Conference about 2 months ago, it was interesting because I think the question that almost everybody asked, and where we really focused a lot of our attention, was so have we started to see any changes in our customers approach to leasing decisions, and just to sort of remind everybody what our comment was which was the answer was no, and we really hadn't, and I think people were all excited to hear us say things have sort of slowed down, we actually hadn't seen any changes other than in fact there were starting to be even more of a pickup in the San Francisco and the Northern Peninsula market of California, which is sort of where we last left you. And I thought this morning what I would do is I'd begin my remarks with sort of a current perspective on that topic.

And again, in the context of everything Mort just spoke about, things are not pretty from a macro perspective and clearly, there's a lot of uncertainty associated with the federal government and the budgetary numbers and where the reductions in the deficit spending are going to come from and when they're going to happen. But at the same time, and I think everyone will acknowledge, that if you think about businesses and use as a surrogate and the earnings numbers that as reported by the S&P 500, we just had another great, great quarter from American businesses, and there were year-to-year increases in top line sales and earnings and the margins.

And where did it come from? Well, it came from computer peripherals and software and semiconductors, Internet services, some consumer on non-discretionaries. Pretty broad sort of face of the economy and at the same time, those same companies have taken advantage of the current environment to put their own houses into a pretty terrific order. And so they've refinanced their maturing data at historically low levels, and they've built up lots of cash reserves. And I think we're also seeing in the markets where we operate venture capital investing is starting to come back again. And there was a pretty significant increase in venture capital spending in the second quarter, and it was concentrated in Silicon Valley and in Boston and actually in New York City. That's where most of the new investment was coming from. And so I don't think it's surprising to see that statistically, the overall leasing trends are continuing to improve in the Back Bay of Boston and in Cambridge in particular, in the Waltham submarkets, in San Francisco, in the CBD and the suburbs. And interestingly enough, and we'll get to in a minute, in Reston Town Center, which I think is a little bit of a surprise.

But there are, in fact, pockets of our economy that are growing despite the uncertainty and the challenging macro issues. And the markets that's dark seeing a pickup are, in fact, being characterized by strong leasing velocity, actual additional space growth, base upon, additional employment hiring by businesses and some modest upticks in rental rates and lower transaction costs. So that's sort of the macro perspective we're seeing across the portfolio that we have.

During the second quarter, we continue to lease space at a really strong pace. We did about 1.2 million square feet and that was actually the highest level in the second quarter we've had over the past 7 years. Boston led the way this quarter. They made up 38% of the transactions. There were a couple of interesting transactions in there, 2 large leases in Cambridge, including a 63,000 square-foot expansion by Google and a 70 -- a 47,000 square foot extension by the MIT Coup, which is our retail tenant that is in our Cambridge portfolio. We had 2 full floor availabilities in our Back Bay portfolio, 1 at the Pre Tower, 1 at the Hancock, 28,000 and 29,000 square feet respectively, they're gone, committed.

And the last remaining floors at our Waterfront building in Atlanta Wharf which is 82,000 square feet, that was leased as well and was leased by a digital media distribution company.

Two weeks ago, we finalized our bill to assume negotiations with Biogen for 17 Cambridge Center, a 190,000 square-foot building and that's not part of the statistics for the second quarter. But activity in Cambridge really is I think leading the region. Biogen is going to announce plans to occupy another building in Cambridge, and Pfizer and the Reagan Institute [ph], is a think tank that focuses on immunology and AIDS/HIV vaccine development. They're also going to be expanding and making new commitment in Kendall Square in Cambridge.

In the suburbs, we completed the 18 transactions in the western suburbs sort of Waltham Lexington market totaling 144,000 square feet. And again that market is dominated by technology and life science companies, which continue to experience growth that we're seeing across our portfolios.

D.C. had a sort of a light quarter with respect to signed leases, but we did complete another floor at 2200 Pennsylvania Avenue, and we're negotiating leases in Northern Virginia involving almost 300,000 square feet of space. And we're in discussions actually with a tenant for a 250,000 square-foot of bill pursuit in Reston.

Now this activity is not coming from Homeland Security or Defense, it's coming from telecommunications companies, digital marketing companies and the construction and engineering industries, which are flourishing in the D.C. region, and they're really not associated with the budgetary issues of the U.S. government.

The gap in achievable rents and concession levels and activity in Reston Town Center is widening more and more against the other total markets, and we're probably over $10 a square foot in pure rental rate between Reston Town Center and those buildings just outside the core.

As we foreshadowed last quarter, there was a law firm in the district that dissolved, Howrey, and it added another 300,000 square feet of really good space at 1299 Penn, and there were 2 other law firm deals that were done in the quarter.

Skadden completed a multi-tenant renewal -- a multi-building renewal, about 400,000 square feet and Holland & Knight agreed to move to 817th Street in 2013.

The reason I say this is because if you sort of look now at what's available in D.C. and where the law firm movement may come from and appreciate that the private sector tenant market is really a concentration of law firm moves and is very much lease expiration. There's only 1 law firm expiration between now and 2015 in excess of 150,000 square feet.

Gives you a perspective on sort of what we think is going to go on in the short-term in D.C. But between 2015 and 2017, there are 12 law firms leasing over 150,000 square feet with expirations and 8 more between 80,000 and 150,000 square feet. So there's going to be a lot of activity. There's going to be a lot of movement. It's just not going to be in the short-term. We're actually designing our 450,000 square-foot development at 601 Naft Ave, which actually matches up pretty well with this expected demand, and we've actually begun discussions with some of these larger tenants in the 2015, 2017 timeframe because quite frankly in Washington, D.C., people get out way in front of their lease expirations.

Third of our activity this quarter was in New York City and that included the 180,000 square-foot lease we did with Morrison & Foerster at 250 West 55th Street and the 67,000 square feet we leased to SAC at the base of 510 Madison.

Now we've actually commenced a pretty extensive prebuilt suite program at 510 Madison with an expectation that a large part of our target market, which are tenants who want to be in this type of the building and are prepared to pay the rent necessary to be in this type of building are really going to be looking for improved installations as opposed to raw space.

When we bought the building, we told you that we'd probably take between 18 and 24 months to lease up the space, we're obviously way ahead of where we expected to be in terms of actual signed leases. But I wouldn't be surprised if we don't tell you that we're not going to have any leasing done in the next 2 to 3 months but as we get some of these pre built suites done which are going to be delivered sometime in the middle of the fourth quarter, that leasing activity will again be showing up in actual signed leases.

This quarter, we also completed a full floor lease on the upper floor of 601 Lex to replace the space vacated by Howrey's dissolution. Howrey had 1 floor in New York City with us. That lease that Howrey had was completed in 2006 and the new rent with the new tenant is 25% higher on a gross basis and 38% higher on a net basis, and we did get market concessions. If you look at the market statistics from midtown New York, leasing activity in June was double the 5-year monthly average. The deals completed in June probably were in the works for some time, but didn't see any tenants postpone lease execution decisions which I think is very different than what we were seeing in 2008 and 2009 as we went into the first part of this recession.

Now that said, our view is that velocity today in New York City is not at the same pace as it was 60 days ago. And we may just be feeling the effects of summer holidays or it may be the uncertainty associated with new capital regulations and the changes to proprietary trading for the commercial banks and the investment banks and tappet low in demand on the commercial banks is having some of an impact on a larger institutional decision-making in New York City, and it's also maybe taking the pressure off some of the smaller tenants to make quick decisions in anticipation of sort of a rapidly tightening market, which quite frankly as we've talked to you in previous quarters, we didn't expect to see happening in New York City in calendar year 2011.

Now at the same time, no more has signed the 900,000 square-foot lease at the Worldwide Plaza building and that's a very sizable expansion for their footprint in New York City, and Jefferies is in the market for a consolidation and expansion as well. We completed 14 small tenant deals this quarter in the remainder of our portfolio. Improvement cost still remain on the $65 square-foot range and free month's probably in the 10-month range as well.

When we do prebuilt suites, I was describing for 510 Madison. We're going to spend more than $65 a square-foot on TIs, but we're going to get a premium rent, and we're also going to pick up in the form of Lex free rent and that's kind of sort of justify the increase in the TI.

In the Bay area, the robust activity on the Peninsula and the Valley continues at a pretty significant rate. Even if there are occasional companies like Cisco that are announcing staff reductions, the combined office and R&D absorption was over 5 million square feet through the second quarter and it's the highest since it's been in the dot-com years.

The Internet services and the software, the computer peripherals, networking and semiconductor industries are all having really terrific years and they have strong hiring goals. There were 27 leases over 100,000 square feet completed in the first half of the year, and there are similar number of active requirements in the market today.

We're feeling the impact in our Mountain View properties, and we have signed letters of intent for another 135,000 square feet in 6 transactions. But I think the most important news is that this activity has finally reached the traditional downtown office market, North of Market Street. After 12 consecutive quarters of negative absorption, the city has seen over 1.2 million square feet of positive absorption year-to-date. During the second quarter, we completed 22 transactions involving 165,000 square feet at Embarcadero Center, including 4 full floor deals, and market activity is picking up.

We signed letters of intent on an additional 230,000 square feet at Embarcadero Center, including more than 140,000 square feet, which is the upcoming availability at 4 Embarcadero. Each transaction involves a tenant in the financial services or the legal industry. There will probably be a positive in revenues, which we talked about before in 2012 because we're going to transition between the tenants there today with lease expiration on the new deals that we're signing and you're going to see a significant role down in our second-generation leasing statistics in 2012 and 2013 because the new leases on 187,000 square feet of expiring rent of $93 a square foot approximately, and we're going to be doing deals in the low 60s. So don't be surprised in 2012 or 2013 when these leases commence from a revenue perspective, and you see a roll down in market rents. We've been talking to you about it for the last 2 years.

Our quarterly second-generation leasing stats are in line with our forecast, and they really weren't impacted this quarter by any significant EC rollover.

The Boston activity was concentrated in Cambridge, but it doesn't include the Google lease since that space was vacant for more than a year. As an FYI, the mark-to-market on the Google space in Cambridge was 28% higher on a net basis. In New York, the impact from the lease at 601 Lex was muted by a few small deals at 7 Times Square and 540 Madison where rents have rolled down from the high 90s to the mid-70s. In D.C., the small mark-to-market comes from our assets in Maryland, and we took back 23 -- 21,000 square feet at 1333 New Hampshire last month -- last quarter when we took back space from Akin Gump, and we inherited from short-term sublets and so we're feeling the impact of those sublets.

In San Francisco, very few transactions hit the numbers this quarter, less than 35,000 square feet at EC. Our average lease length was a little bit shorter this quarter, 5 in the third years and mostly concentrated in the suburbs. Therefore, our transaction cost again where have been on the low side of $22 a square foot. But our portfolio office mark-to-market is increasing again, and now we're up about $1.10 positive.

We elected to pull our sale of Princeton from the market this quarter. Unfortunately, the group that we contracted with, original equity partnership fell apart and they just weren't able to reconstitute themselves inside of our 10/31 exchange window. And as we discussed at the outset of the sale, given the environment, without the ability to defer the big gain that we had on that sale, we weren't going to sell that asset outside of the 10/31. Now, there continue to be a lot of capital chasing assets in our core markets as Mort alluded to. But truth be known, there are very few core stabilized assets in the mix, which makes it a little more difficult to sort of gauge where the market is with regard to pricing.

When stabilized assets are available, and there are a few of them, there seems to be 1 or 2 bidders that are really pushing pricing to levels that are very much represented around the valuations of 2006, 2007. Let me give you an example. In Boston, building with an address of 33 Arch Street, traded at sub 5 cap about $530 a square foot sort of adjust for the parking in the building. It's a building that would not to be in our top 10 office towers in downtown Boston. It's 89% leased. And if you ask people sort of for the color in the market on it, they'd say, well, it’s the only class A building that's been on the market since Hancock traded and everybody wants to get into Boston. Well, when we purchased the Hancock -- this is to give you a perspective. We purchased it for $475 a square foot, and the first year NOI was 4.6% despite the fact that it's just 240,000 square feet of leased space to Bain with no current rent. So to give you perspective of how frosty things are for okay buildings, whether just isn't much in the way of product on the market.

In New York City, there appeared to be a lot of assets that are "in play" on the market, but what they really are, are predominantly recapitalizations transactions, and these include 1633 Broadway and 375 Park and 299 Park and 650 Madison and probably 1211 Avenue of the Americas. Each building has a little bit of a different story, and while the transactions are getting completed with very aggressive valuation, they are highly structured transactions and they only take up a portion of the capital. So when people talk about the activity on their sales side in New York City and they attributes on a $1 billion transaction, the full value of that building, I think they're really overstating the magnitude of the interplay of what's going on in the city right now. There are new capitalizations going on. There is new equity coming into these deals, but it's worth 25% interest, or 30% interest, or 40% interest. It's not a sale of an asset.

Our development pipeline and our platform continues to really be our best source of incremental investing on a very current basis. The Defense Intelligence Agency and the 500 North Capitol JV developments are in the mix of intense construction phases. We completed the expansion of our 50/50 joint venture with the Gould Family at Annapolis Junction, that's outside of Fort Meade and is BRAC related. And we are constructing a 2-storey 120,000 square foot $28 million speculative development that will be completed in the fourth quarter, and there is actually good user interest, but this is probably one of those places where we are in fact feeling the effects of what's going on with Congress and until the budgetary issues are resolved, there are just no new contracts that are being led, and it's probably going to affect our leasing to some degree.

In Reston Town Center, we are completing the permitting of our 359-unit, 350,000-square-foot residential building, and we expect to be under construction before the end of the year. We're in the process of completing the purchase of the remaining trades at 250 West 55th Street and you will likely see a steel erection crane out there before the end of the year. Spaces are going to be delivered to tenants as early as the summer of 2013, and the building will likely be placed in service in early 2014, and we continue to be in active dialogue with tenants in 150,000 to 300,000 square-foot range.

And in Cambridge, Biogen intends on occupying that new building that we're building for office. We are also designing it so that it can accommodate laboratory requirements. It's expected to be delivered in July of '13, and we'll achieve a double-digit cash-on-cash return on $86 million of investment. With the addition of the Biogen building on our -- in our development pipeline, we now have commitments, including just our share of the JVs, of $1.3 billion to be delivered between 2012 and 2014 and that doesn't include any of the properties that have already started to come into service.

I'm going to end my remarks with one formal note, one final note on our acquisition activities. As we stated in the past, we're open to investments in new markets both in the U.S. and possibly outside the U.S. We are primarily interested in investing in markets that share the common traits with our existing markets, that 24-hour cities with highly educated workforces, with high barriers to entry, diverse and strong international tenant base. And we would expect to establish an operating platform over time. It's also very important that we understand the political and legal structures, and that those structures are, in fact, very stable. So there have been some reports in the media of our being interested in London, and we do believe that London fit these parameters. This doesn't mean there is an investment that is imminent but we have been evaluating opportunities and learning about the market, and we've been doing this in other markets as well, and we are open to doing so in the future. And with that, I'll stop and let Mike carry on.

Michael LaBelle

Great. Thanks, Doug. Good morning, everybody. Before I get to the earnings results for the quarter, I just wanted to touch on our capital markets activity. This quarter, we closed on a 3-year extension of our line of credit taking its maturity out to 2014. We reduced the size of the facility from $1 billion to $750 million based on our potential usage requirements. Although we included a $250 million accordion feature in the event we want to increase it back up to $1 billion. The pricing, which was at an all in cost, including the annual facility fee of LIBOR plus 145 basis points, is higher than our previous line but it's significantly lower than where these facilities were being priced just a few months ago. Pricing in the bank market has tightened in the past couple of quarters, and we're seeing it not only in lines of credit but also in construction and term loan markets. We're in the market for construction loans on 2 of our joint venture developments and are getting strong interest from multiple lenders.

We are finalizing documentation on that $725 million refinancing of 601 Lexington Avenue. We've actually locked our interest rate now at 4.75% for a 10.5-year term with the syndicate of life insurance companies and expect to close later this month. Although there has been volatility in CMBS spreads recently, we still see the life insurance companies as competitive originators of term loans for good quality buildings as long as the leverage is moderate maxing out around 65% loan-to-value. Credit spreads in the market range from 150 to 200 basis points over the comparable term treasury rate.

Our unsecured borrowing options remain appealing with bond spreads around 150 basis points resulting in a 4.25% coupon for 10-year money today. The convertible debt market has seen limited new issuance in the last couple of years and a real reduction in the overall size of the market as old converts have been repaid but haven't been replaced with new. The lack of supplier has resulted in a fertile environment for new issuance, and we could issue new 5- to 7-year convertible debt at coupons of 1% to 2% and stock price premiums of 20% to 25%.

As we look out to our 2012 debt maturities, we have $625 million of convertible notes that the holders can put to us in February of 2012, and those notes have a cash coupon of 2 7/8% and a GAAP coupon of 5.6%. We are considering a variety of alternatives for this debt, and any early refinancing we do could result in a one-time prepayment charge, although it would result in future GAAP interest savings based upon the current market.

As you may have noted in our supplemental, our weighted average borrowing cost for the entire debt portfolio has dropped to 4.7% on a cash basis. With the refinancing of 601 Lexington and 510 Madison from floating to fixed, it will rise slightly next quarter to about 5%, still an extremely attractive portfolio debt rate. On a GAAP basis, it is about 45 basis points higher due to the incoming treatment of our convertible debt. We continue to layer low coupon long-term debt into our capital structure with an objective to maintain it for years to come and enhance our equity return.

Turning to our earnings. Our second quarter funds from operation was up by more than $22 million over last quarter, with the majority driven by organic portfolio NOI growth, new developments placed in service and fee income generation. This was $7.4 million or $0.04 per share above the midpoint of our previous guidance. Our portfolio of revenue was in line with our projections while operating expenses came in lower than expected, resulting in about $3.5 million of net outperformance to our budget. A good portion of the reduced expenses, roughly $2.5 million, is related to repair and maintenance items that we expect will be pushed into the third quarter, and the remainder represents true operating savings. We exceeded our budget for development and management services income by $1.2 million, just over half relates to higher-than-budgeted work order income from greater usage of services in our buildings spread across the portfolio, which is really an indication of heightened activity by our tenants, and the remainder is due to leasing commissions earned in our joint venture portfolio, particularly at the GM building where we executed several leases this quarter.

The contribution from our joint venture portfolio was $1.4 million ahead of budget due to a combination of higher percentage rent from Apple at the GM building of $600,000 and $350,000 of lower interest expense on the loans for our Mountain View properties and our value-added fund. We had a variety of leasing wins and other income that made up the rest of the variance to our budget on the JV side.

As we disclosed in our press release in June, we've restarted development activities at 250 West 55th Street in Midtown Manhattan. The impact of resuming capitalization of interest on our existing $480 million of investment in this project was not in our prior guidance, and it reduced our interest expense for the quarter by $2.8 million. These positives were partially offset by an increase in our G&A expense for the quarter of about $1.5 million, primarily relating to legal and other diligence expenses for the Carnegie Center sale and to a greater extent, several acquisitions that we've pursued. Looking now at the full year 2011, we've actually increased our guidance pretty significantly, but much of it is attributable to 3 key events. First, and as Doug mentioned, we elected to terminate the agreement to sell our Princeton portfolio. In our prior guidance, we assumed this sale at the end of June, so the contribution for the property for the second half of 2011 was excluded from our projections. The portfolio is projected to contribute approximately $15 million in the second half or $0.09 per share at FFO.

Second, we announced the resumption of 250 West 55th Street. We have resumed capitalized interest on the existing investment and we will capitalize interest on all new development dollars expended on the project. For 2011, we expect an increase in capitalized interest of $16.7 million or $0.10 per share associated with 250 West 55th. And last, we'll receive a large termination payment from a tenant that is exiting a 700,000 square-foot, 3-building office campus in Reston, Virginia. The leases for this campus provide for restoration of certain specialized improvements by the tenant. And we completed the negotiation of the value of these items this past quarter. We will receive a total of $14.8 million recognized as termination income, $13 million or $0.08 per share of which will be booked in the second half of 2011 and the remainder in 2012.

As we've discussed before, we will be taking 2 of these buildings out of service for portions of 2011 and 2012 to complete a full renovation for occupancy by the Defense Intelligence Agency subject to a new 20-year lease executed late last year. The DIA will not be in full occupancy though until 2013, and the transition time in between leases will reduce rental income by approximately $5 million in 2012 from 2011. This is in addition to the $11.2 million decline in termination income from this transaction year-over-year. The third building in the campus is 182,000 square feet and its lease expires in May of 2012. It is not part of the DIA transaction and we do expect to experience downtime before releasing it. These 3 items aggregate $0.27 per share of projected 2011 FFO that was not in our prior guidance. In our same-store portfolio, we aren't projecting any significant changes from last quarter. And we still project 2011 same-store NOI to be up 5.5% to 6.5% on a cash basis, and down 0.5% to 1.5% on a GAAP basis from 2010. In the second quarter, our cash same-store NOI was up a strong 9.7% from 2010. The result of the burn-off of free rent from our 2010 leasing program, including at the Prudential Center in Boston, 399 Park in New York City and 601 Lexington Avenue in New York City.

We expect to give back a portion of our first half same-store performance in the third and fourth quarters with lower comparable free rent, as well as a drop in San Francisco due to the expiration of leases, totaling 187,000 square feet at Embarcadero Center 4 and the expiration of Bain Capital in 270,000 square feet at 111 Huntington Avenue in Boston in October. As Doug described, we have great activity on the EC space, and we've already re-leased the Bain space. But there will be a significant interruption in revenue in the fourth quarter 2011 as well as 2012, as we transition between tenancies. For 2012, we project the NOI for these 2 properties will be down by approximately $16 million from 2011.

Our occupancy continues to hover just shy of 92% with most of our availability located at Bay Colony and a few other suburban assets in Boston, in San Francisco and in Princeton. Our occupancy loss at Embarcadero Center 4, the downtime between tenancies at 111 Huntington Avenue, which is 100% re-let, and the removal from service of the first of our buildings in Reston, again, which is 100% re-let, will result in a decline in our occupancy over the next couple of quarters to near 90% by year end. With the 300,000 square-foot MSF lease commencing at 111 Huntington in January 2012 and the pickup in activity we're seeing in San Francisco and in Boston, we do expect our occupancy to edge back up through 2012.

Our 2010 acquisitions, which include the John Hancock Tower and Bay Colony, which are not in our same-store, continue to be in line with our prior projections for 2011. In our development portfolio, we continue to make positive strides in our lease-up with Atlantic Wharf and 2200 Pennsylvania Avenue nearing stabilization at 90% and 89% leased, respectively. We signed 4 more leases at 510 Madison as well and are now 39% leased. We're also making good progress in the leasing of our 2 residential buildings. At the Residences on The Avenue in Washington, D.C. where we have 335 units, we are now 54% leased and have been open for only 3 months. And in Atlantic Wharf where we have our 86-unit boutique building, we opened on July 1 and are 23% leased. The residential buildings will not contribute to NOI in 2011 due to their being in their leased-up phase but should be stabilized by mid-2012.

Our actual rents are above pro forma in both Washington, D.C. and Boston, and are leased up ahead of our original schedule. In total, we project the development portfolio to contribute $35 million to $38 million to the full year of 2011. This is similar to our guidance last quarter. We expect all 5 of these developments to be stabilized by the end of 2012, and upon stabilization to deliver an average, unleveraged following year cash return of approximately 7.3% on the $1.3 billion of total investments.

Straight-line rent and FASB 141 rent for the consolidated portfolio, including our development properties, are projected to be comparable to our guidance last quarter at $79 million to $84 million for the full year. As I noted in the outset, we expect a substantial bump in termination income in the second half of the year. Because of its variability, we don't include termination income in our same-store statistics. We expect to generate $16 million in termination income for the full year, $11 million higher than our prior guidance. We do not expect this level of termination income to recur, so as you review your 2012 models, be mindful of this as well as the major rollover in the fourth quarter of 2011. On a run rate basis, we expect the consolidated portfolio NOI to be up $2 million to $4 million in the third quarter and then stable between third and fourth quarters as the additional contribution from our developments offsets the loss of occupancy in the same-store portfolio.

Our hotel operated in line with our expectations for the quarter. It continues to show a solid 8.3% year-to-date RevPAR growth over last year, and we project it to contribute $8 million to $8.5 million of NOI for the year. In our joint venture portfolio, we completed several additional leases at the GM building where straight-line rent will commence in 2011, including a 5-year extension with FAO Schwartz that was in line with our market expectations but higher than our earnings projection due to the uncertainty of the fair market rent arbitration process that was ongoing last quarter. We also leased 30,000 square feet of previously vacant space at Market Square North in Washington, D.C. with an October 2011 start date.

With Apple's robust sales growth, we've upped our percentage rent projections for the year as well. In aggregate, we have increased the projected contribution from our joint ventures by $5 million, projecting a full year contribution after interest expense of $135 million to $140 million.

The contribution includes $70 million of noncash FASB 141 fair value lease revenue and $14 million to $16 million of straight-line rents. In 2012, we expect the cash contribution from our JVs to increase. But we will have $16 million of FASB 141 income burning off, causing a projected decline in GAAP NOI as we experience downtime associated with the expiring leases.

Given the outperformance for the quarter and our development and management services fee income, we are increasing our projection by $2 million for the full year, and now project $29 million to $31 million for 2011.

Our G&A was slightly higher than projected this quarter due primarily to diligence costs that we incurred pursuing acquisition opportunities, and we're increasing our projection for the full year by $1 million, $81 million to $83 million for the full year. We are expecting a significant reduction in our interest expense for the year. As I mentioned, we have capitalized interest associated with 250 West 55th Street that is projected to total $16.7 million, including the allocation for the second quarter, and we've also locked our rate on 601 Lexington Avenue for that loan at 4.75%, which is lower than our prior projection, and the delay in the closing of that transaction by a month has saved about $2 million.

Our net interest expense is projected at $382 million to $386 million for the full year 2011. The interest income component is projected to be $1 million per quarter and capitalized interest is projected to be between $48 million and $50 million for the year.

Adding all of these assumptions together, we are increasing the midpoint of our full year guidance range by $0.31 to a new range of $4.78 to $4.83 per share. As I noted before, $0.27 per share of this increase is due to nonrecurring lease termination income, the increase in capitalized interest for 250 West 55th Street and restoring Carnegie Center to our guidance.

For the third quarter, we're projecting FFO of $1.23 to $1.25 per share. We expect to have close to $1 billion in cash and full availability under our line of credit next month after closing our 601 Lexington Avenue financing. This provides strong capacity to not only fund our growing development pipeline, but also to make additional investments, get it to drag on our earnings when it is invested in short-term highly rated investments.

That completes our formal remarks. Operator, you can open the lines up for questions.

Question-and-Answer Session

Operator

And your first call is from Chris Caton.

Chris Caton

I wanted to follow up on the dire [ph] economic discussion in your -- if you're changing your leasing strategy at all. I think in the past you've said you need to market. I wonder to what extent that -- how's that shaping up here in the third quarter and also to the extent that, that may be shaping your disposition plan?

Douglas Linde

I'll start and, Mort, please, chime in if you think I'm being too aggressive here. I think what you heard us say, Chris, was that while we do feel that the macroeconomic conditions are not terribly robust, we continue to see a pretty strong growth trajectory in our core markets with regard to the locations and the tenants that are looking to be in the buildings where we operate. And so we're seeing on the margin an improvement in the conditions in those core markets. And that happens to be where the majority of our availability is. And so I would say, we're not in any sense changing our leasing perspective and focus because at the moment, we're not seeing any sense of change in our tenants' appetite for space other than, as I've said, potentially a slight slowdown in New York City. But again, that may very well just be summer.

Chris Caton

And you think that kind of dichotomy of a weaker economy and better fundamentals, you think that's sustainable or is this -- are you just kind of evaluating on a realtime basis?

Douglas Linde

That -- if I could answer you with great conviction, maybe I would be figuring out where interest rates are going, too. Our perspective is that the overall economic conditions are going to be a challenge for a while, but the overall U.S. economy will, in fact, work its way out of this mess that we are in but it's going to be a lot of the same as opposed to some sudden change. And so as long as the types of companies that are prospering today continue to have the revenue streams and the innovation and the margin improvement, on a relative basis, that they're seeing, we're not pessimistic about the ability to see growth in places like suburban Boston and Reston, Virginia and California, both in the Peninsula as well as in the city, and in Cambridge, Massachusetts and in the Back Bay of Boston and the Plaza District of Midtown Manhattan.

Chris Caton

And then last one for me. When you evaluate your international strategy without being specific to market, would your preference be to do a one-off acquisition or would you like to make a more consequential investment in one-time?

Douglas Linde

Mort, do you want to take that?

Mortimer Zuckerman

Yes. Frankly, I don't think we have a specific priority. And it really depends on the opportunities that we encounter and the credits on which those opportunities presented we would now have to take to do it on a multi-building basis. If we like the building, then we will, I think, most likely be doing it on a one-building-at-a-time strategy just because of the nature of the market that we are looking at.

Operator

Your next call is from Jeff Spector.

Jeffrey Spector - BofA Merrill Lynch

Given that the government is your -- you have the most exposure on a tenant basis to the government, can you just talk to us a little bit about that risk and how we should think about that?

Douglas Linde

Sure. And I'll -- Ray, feel free to do the additive here. The majority of our government leases are long-term leases or they're sort of mission-critical locations. And I think that in the short term, what we're ultimately going to see is if there were a lease that were expiring, and we have very few other than the contract, continued stuff that's going on up in Annapolis Junction, that those leases would just simply be extended on a short-term basis because there's no ability for the U.S. Government to go out and put a prospectus out there for a long-term commitment. But I think that particular types of buildings that the GSA is leasing from us and the fact, for example, the DIA commitment. They just made it a 20-year commitment. Really don't put us at risk for any changes in our existing portfolio with regards to the U.S. Government.

Raymond Ritchey

And just to amplify, Doug. We're seeing a lot of the GSA users coming to us well advance the lease expiration saying that, we don't have the capital to move, we don't have the capital for major renovations, but we like the buildings that you have for us. We like the services you're providing. Let's get together and to the extent we can do an early renewal and lock in a, what they perceive to be a very competitive rate well in advance than the lease expiration. So I would say that we're in very good shape also to our GSA exposure.

Jeffrey Spector - BofA Merrill Lynch

Okay. And then just I have one more question and Jamie Feldman's here with me, he has a couple. Just quickly on D.C., any thoughts of maybe selling the multifamily project there given where cap rates are and some of the trends we're seeing in DC?

Douglas Linde

I think that we are -- there is no immediate plans to sell the multi-tenant property in either D.C. or in Boston. We really like the product that we created. We really like the timing associated with our lease-up. We are -- we recognize that we are not as savvy an operator of these assets as a public real estate investment trust company or somebody who's got 12,000 units across the country, so we recognize there's some amount of big that we're losing there. But I think we like the growth prospects on the assets that we have from a rental revenue perspective, and we're going to have a wait-and-see decision. And if we are in a position where we are looking for capital and we're not sitting on big balances of cash, it may be an appropriate transactions to look at disposing of, but there's no immediate plan.

Raymond Ritchey

I would also just add that Doug that virtually every one of our highly successful mixed-use projects, be it urban or suburban, that involves a residential component. And rather than spinning those off to third party operators who may or may not perform to our standards, having that arrow in our quiver, that we can execute multi-families. It's going to be, I think, increasingly more important with the -- for these projects.

James Feldman - BofA Merrill Lynch

And then this is Jamie with just a quick question on Silicon Valley in San Francisco. I mean, given the relative strength of that market, how do you think you could expand your exposure there? I mean, you've got the land in San Jose, is there interest in development there or is that a little bit outside the core? And then you have the Mountain View. But, I mean, can you grow further from here?

Douglas Linde

Well, we -- I think we are actually surprised at the fact that there are, in fact, 3 or 4 developers who are at least talking the game that they are going to start speculative development because we don't think the market is quite there yet. But if the market continues to have this robust growth that it’s had over the past, call it, 9 to 12 months, I think there's certainly an opportunity for us to look hard at the Zanker Road property we have and the North First property we have to do something that would involve incremental development on those sites. I think the site that's most challenged for us, quite frankly, is the site that is in downtown San Jose because I think that market has not been as robust as the others. We continue to look at other assets in the Silicon Valley. It's a very volatile market so you got to get in and you got to be comfortable that you're getting in at the right time and you got the right property. And, Bob, did you have any other comment for that?

Robert Pester

No, I mean we've got several million square feet that we can build on North First, Zanker in the downtown. And clearly, the market's not there yet and it probably will be another 6 to 9 months until we know whether that market's sustainable from a rent growth standpoint, and at that point, we'll reevaluate whether or not we should develop.

James Feldman - BofA Merrill Lynch

And then finally, can you talk about the plans for Biogen's building in the suburbs given their new development?

Douglas Linde

Sure. So Biogen signed this 15-year lease with us. Biogen has a 15-year lease with us. Biogen is in the process of determining how much of their current footprint is going to be in the suburbs and how much of it's going to be moved into Cambridge. And Biogen, once they've determined what the timing of that is and how much they're leaving, we expect we'll be looking to sublet that property on a long-term basis to other tenants.

Operator

You're next call is from Michael Bilerman.

Michael Bilerman - Citigroup Inc

Josh Attie is here with me as well. Mort or Douglas, I want to come back to sort of looking at these other markets. And while I know on one hand it's always a duty to sort of think strategically about where else you want to be. You had a pretty straight strategy in these core markets for a long period of time. And, I guess, why now in terms of the taking a more serious look or more time when, Mort, I think you'd said in your opening comments that these sorts of assets, these core assets is where the capital's chasing the most and probably where they're getting bid up the most. So what is it about the environment today that makes you want to be more aggressive, putting aside the fact that you have cash and you're well-capitalized, and can ask, why would you want to enter in at this moment in time?

Mortimer Zuckerman

Well, it's in part because we are capable of taking on additional market and we are looking to do it on terms that we would feel comfortable with, both in the immediate term and the longer term. And we have the capital to do it. At some point, we had full offices in all the markets that we are in. We think we are in a position because of the very, very, [indiscernible] absolutely, I don't -- can't think of a better way to do it. The very satisfying way that we came through the last couple years and the validity of the strategy that we followed, and we feel very good about it, we think we are capable of continuing to grow the company and not just in the markets that we are in. So we're not going to buy buildings that have 3% cap rates, don't get me wrong. But I think we're in a position to do things and particularly, if we can find another market that we like. And the markets, for example, in the other parts of the world do not have the kinds of cap rates that we have in this market. So it's an opportunity, we think, and we want to get involved if it's possible in another market that we think that has the main characteristics of the markets that we are in and can provide another platform from which to grow the company. We want to continue to grow the company and we -- it's not a smooth transaction world. They're almost all one-off and you just have to be out there looking for them and just trying to put them together, and that's what we're going to be doing. And we're going to try and do it at least in one other market and if we can come up with other sauces in there too. I don't think we have any sort of policy constraints that this thing is going to gain other than the fact that we want to be in certain kinds of markets and we want to be at the upper end of those markets. And that's what we're going to be looking for. They're not -- this is not going to be easy to come by. We think that there are a lot of people that now realize that it is the best place to be so we're just going to have to play the game and see if we get our opportunity or not. We will find out when we do play that game, sooner or later if we do come up with an opportunity.

Michael Bilerman - Citigroup Inc

And you've talked about London and you talked about Toronto in the past. How many other markets are there outside of the U.S. and how many are there within the U.S. that you're sort of -- on your target list to look at?

Mortimer Zuckerman

Well, we certainly -- we look to Toronto and we spent a fair amount of time there, and we had potential opportunity there but there is a special tax provision there that maybe makes it much more difficult for us to go into that market because the income there has a fairly high tax, at least by our standards, I think it's 31% if memory serves. And that makes it very difficult to be competitive in terms of our investment in a market like Toronto. London is another thing. Again, we're looking at it. We want to develop an office there if we can get the kinds of properties that we would like. There are a lot of foreign investors who are very interested in going into the London market so nothing we're going to do there is going to be cheap, but we are intending to, if we can, build an operating platform there and see if we can continue to grow in that market as we have in the other markets that we've been in, which is a big point still, even more just theory than practice. We invested one particular situation, which at this point is not going forward for reasons of what our due diligence can invest. But having said that, there -- we still like the market and we're going to look around for additional activity within that market. The other thing that we find, frankly, is that -- and it's, in the way, if we go [indiscernible] but not totally. Boston Properties has a very good name recognition and reputation in these markets, and that helps us in terms of the possibility of expanding our reach. But we're going to be very careful and very selective about the markets that we go into if we do go into the market, because we do believe that the fundamental strategy that we followed so far is the strategy with the intent to follow it as we go forward.

Michael Bilerman - Citigroup Inc

And then just a question, just going back to your comments on New York in terms of the transaction activity that predominantly you're using a lot of recap trades and I don't know if Bob Pester on the call as well. But in terms of how that's impacting the leasing market, you mentioned Nomura, right? It's the Worldwide Plaza that's off of everyone's radar. No one would lease there, and all of a sudden, as it gets recap and the leasing is happening. So has that changed the dynamic at all with a lot of these assets now getting new fresh equity and more stable cap structures impacting the leasing in the marketplace?

Douglas Linde

My answer, Michael, would be that it certainly was for some of the distressed assets. I think the term distressed is no longer one that's used in sort of the normal course of describing the New York City office building market. And while there may be some buildings that are in and around the downtown market or in markets that are south of 42nd Street and off of Eighth Avenue, places like that where there may be some recapitalizations going on that I think are in line with your suggestion which is a building that really was being starved from capital suddenly has an opportunity to be more aggressive about leasing space because it now has the ability to do transactions. I mean, clearly, that was the case with Worldwide Plaza prior to the sales that come through from Deutsche Bank, there was nothing going on there. The majority of these other recaps are high quality buildings. The one building that I would say, again, was in that sort of dialogue and is not is 280 Park Avenue, with the ESSO green in Granado [ph] having recapitalized ineffectively. They are certainly in a position where they can do transactions. I'm not sure the building was ever out of the market, because I think everyone appreciated that given the location, that building would in fact have some capital come to it at a point in time when there was a real lease to be garnered there. So I think most of the buildings have gotten to the point where they are stabilized and are no longer -- there's no longer a have and a have-not list when tenant reps are bringing their clients through buildings in Midtown Manhattan.

Operator

Your next call is from Rob Stevenson.

Robert Stevenson - Macquarie Research

Doug, can you talk a little bit about the TIs and leasing commission trends in your various markets in terms of where you're seeing the biggest improvements over the last 6 months and what the recent trends have been and sort of which markets are still stubbornly high versus historical level?

Douglas Linde

I would tell you that I think they're all stubbornly high, because they're -- it's just where the market is. We are in our downtown markets, be it Boston, Washington, D.C., New York City or San Francisco, giving $65 plus or minus a square foot on second generation spaces. And in Washington, D.C., as shocking as it may sound, $90 to $100 a square foot is sort of the norm for a "new premier building." You're also getting a new premier rent, which is somewhere in the mid-50s on a triple net basis, so it goes sort of correspondingly hand in hand. The TIs haven't really pushed down significantly. The -- I think that the contribution that the tenants are putting into the spaces are starting to pick up again. So there was a point where tenants were saying, "Well, we really don't want to put any capital into the buildings and we really want you to do it." And because of the cost associated with redoing a floor for 10 years or more, there was not an insignificant amount of capital that would have to go in there. And at that point, some of the numbers were slightly higher, so you might have seen $70 or $75 a square foot in the San Francisco or Boston or New York City market. And it's come down slightly from that, but it's been pretty sticky. And then in the suburbs, in suburban Boston, suburban Washington, D.C., your still depending upon the transaction. If you're doing a 10-year lease, you could be at $50 a square foot. And it's the -- you got to have the perspective that as good as things have gotten relative to where they were, they're still, in almost every one of these markets, a double-digit mid-teens availability rate. So it is not a landlord's market from a demand perspective.

Robert Stevenson - Macquarie Research

Okay. And then can you talk a little bit about the sale of Two Grand Central, how you're finding the interest level and whether or not the vacancy there is -- that you guys feel that you're going to get the pricing for a higher vacancy or a higher occupancy level?

Mortimer Zuckerman

I can't say. I don't think we ought to discuss that at this point since we're in the throes of that kind of conversation, and this would not be the appropriate forum in which we went through this on an leasee -- where we come out and talk about it at the next conversation. It's just not where we would want to have this kind of a conversation. It's not because we don't want to share it with you, but we're in dialogue with various people. We don't think we ought to have an open conversation about it.

Operator

Your next call is from Michael Knott.

Michael Knott - Green Street Advisors, Inc.

Just curious, can you elaborate a little bit more about your view on Manhattan? I can't tell quite if you guys are bullish or kind of maybe a little bit -- a touch bearish on Manhattan from here maybe versus your perspective 3 months ago. And then just kind of how do you think this cycle looks in Manhattan over the next couple of years.

Douglas Linde

I would say we are very much bullish on Manhattan. I think we have recognized that be it the summer or be it the uncertainty in the world with regards to, in particular, how financial institutions are being reviewed and understood in terms of what their business models are going to be, there's sort of been -- sort of a slight pullback from those institutions. And while that is occurring, I don't think anyone is suggesting that the Manhattan market has gotten soft. It is just not as robust as it was 60 days ago. And as I said, the transaction activity in the month -- in the second quarter was fantastic. No leases were sort of put on hold because of what's going on in the world, but our sense is of that there is not this -- quite the sense of urgency that there was in January, February, March that there -- today in July of 2011 from tenants' perspective.

Michael Knott - Green Street Advisors, Inc.

Okay. And then just to go back to the question about international expansion. I was a little surprised to hear sort of the reasons being -- because you have capital and to grow the company. What do you think about the expected return profile of that kind of deal maybe relative to what you can do in your current markets? Do you need a higher return in those markets versus markets you're already familiar with. Just curious your thoughts on that sort of angle.

Mortimer Zuckerman

Well, each market has its own sort of dynamic and cap rate. Frankly, I think we would have probably have a starting off yield in some of these other markets that would be higher than we would have if we were buying buildings just to stay at the current major markets that we are in just because of the nature of the way those markets play out. But they have different features, so we have to take it into account. What we are basically looking for are markets which -- in international cities with a big financial component, where we think we have comfort, in the long term, growth of those markets and appreciation of assets over time. I think we're in a position to -- and it's not easy to find these assets, but I think we are in a position, if we do find them, to make reasonably judicious acquisitions that will meet the kind of longer-term growth patterns that we expect from our investments. From our point of view, it's clearly another platform for growth, and we don't -- we're not going to very small cities or other cities that we don't think have the characteristics that we see in the markets we're in. So we just feel this is sort of another level of opportunity, and we're not being precipitous. We're going to move very carefully. And if we find a situation that we like, we'll move ahead and only under those circumstances. And we would, frankly, use the same standards in the markets we're in.

Operator

Your next call is from Alex Goldfarb.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

Mike, just want to get your thoughts. You had mentioned sort of CMBS and life at the beginning but just want to understand a little better. If the CMBS slowdown continues, do you think that the life companies will remain as aggressive as they are? Or do you think they made gap out a bit? And then also just curious, from the sovereign side, do you think that increased interest from sovereigns and lending on CBD assets could backfill any giveback where CMBS pulls back?

Michael LaBelle

I mean, I think -- I'm still confident that the CMBS market will work its way out. I think that this is -- they have experienced, over the past kind of 6 to 8 weeks a little bit of growing pains in coming back from where they were during the crisis and people looking very closely and some concern over the quality of what is in some of these portfolios, some thinness in the investor base, where you have a 1 or 2 that may decide they're not going to play, and it kind of affects a deal. But I do believe that, that market will have a place in financing commercial real estate and office buildings. On the life insurance company side, they will compete with each other as well as with the foreign institutions that come in. And before we had significant amounts of CMBS, they competed with each other, and there were competitive spreads that were -- if you look at historic standards, their spreads were not ever tremendously outside of where they are today. If you look back 5, 6, 7 years and you think about somewhere around 200 basis points as a credit spread for a life insurance company on high-quality mortgage, pretty much in line with where the history and the expectations are and where we are currently. So I feel like there's plenty of capital that those companies need to put out. I think the challenge today is financing higher leveraged assets and financing assets that are in tertiary markets or lower quality assets. For our stuff, when we go and talk to the insurance companies or the foreign banks, we are right in their target market. So we have plenty of bids to come out and -- look, even for an asset the size of 601 Lexington Avenue, which is a big loan where you need multiple insurance companies, and you think about it. Well, there's probably only 7 or 8 insurance companies that can really play in that, but that was enough to create a competitive environment so that we -- we were able to get ourselves a pretty competitive and attractive transaction. And if we were doing that again today, I would think that we would have a similar dichotomy of separate life insurance companies and foreign banks that were willing to compete and bid for those loans.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

And then what about on the sovereign side? Like, are you seeing sovereign to maybe instead of investing in treasuries are looking to invest more in CBD office?

Douglas Linde

Alex, let me answer that question. There have been some sovereign funds that have gotten into this. So for example, GIC has gotten into a couple of these deals and bought the -- sort of the subordinated pieces of the money. CIC effectively is doing it, because they have investments in Bank of China and places like that. We have not seen any of the "Canadian sovereigns" or the Middle Eastern sovereign funds by themselves say, "We're interested in making loans." They're not -- at the moment, none of those companies are set up to originate loans. It may very well be that are giving money to some of their U.S. partners. So that an insurance company may have a pool of capital from a particular fund like that, that they are using to supplement their own particular lending strategy, but we have not seen direct investing from any of those folks.

Alexander Goldfarb - Sandler O'Neill + Partners, L.P.

Okay. And just my second question is on the Princeton portfolio. Just sort of curious. Have you guys gotten any reverse inquiries now that it's -- people know that you were marketing, and it's now -- that deal fell through? But have others come back to you saying, "Hey, we'd like to buy?" And if so, just curious if the valuations are what you would consider attractive or if it's not really there yet. And I understand that you'd want to time any sale to be tax efficient.

Douglas Linde

The answer is we certainly -- we have certainly had conversations from people who were sniffing around the transaction and who were not chosen to go forward, who'd say' "Hey, if you ever sell the property again, we'd love to take a look at it." This is sort of where our bidding was, which we already knew where it was. At this point, we are not engaging in those conversations. We're engaging with tenants to try and reduce the amount of available space in the project. And again, if the moment is right and we think the right thing to do is to sell the asset, we'll -- we would execution at some point in the future.

Operator

Your next call is from Sri Nagarajan.

Srikanth Nagarajan - FBR Capital Markets & Co.

Just a quick question. Given your commentary on what I would call is a frothiness in the market as well as the government uncertainty and lack of jobs, one quarter ago, we were talking about competing development in Midtown Manhattan today. What is your sense of the competitors' prospects and more new development in Midtown Manhattan?

Douglas Linde

I don't think anything has changed, Sri. The large tenants that were -- are looking at the West Side rail yards or the site across the Port Authority bus station or the Farley Building or the other " mega-sites." I'd soon have long-term perspective, and they want to be in New York City long term. And they're looking to consolidate or change the way they are using real estate, and they continue to be thoughtful about their alternatives are. We are competing with a group of tenants that are not looking at those types of buildings, because our delivery is going to be 2014-ish. And those other building deliveries are going to be 2016-ish or later for the most part, because they have to build platforms, in theory, before they get going. So we haven't really seen any meaningful change in the dynamic for those other potential competitive new developments in those locations in Midtown Manhattan or in -- or downtown.

Operator

Your next call is from Jay Habermann.

Jonathan Habermann - Goldman Sachs Group Inc.

Maybe for Mike on the converts and the -- they become plausible in 2012. You mentioned possibly addressing them in the back of the year. Can you give us some sense of your bias at this point? I know rates are still relatively low, and taking advantage of 10-year money at this point might still be attractive but just your interest in terms of issuing new converts.

Michael LaBelle

Well, I think that -- we have this discussion pretty constantly around here given the attractiveness of the capital markets. As we look at the level of treasury rates, certainly and the coupons available in the convert market versus the bond market, I mean, both are potentially attractive places for us. We do believe that the right thing for us to do is to refinance this debt. We do believe it's going to be put to us, so we're expecting that we will be refinancing this debt. We haven't made a decision on what type of debt to use. I would say that longer term is better. So one of the negatives about the convert market is that it's typically shorter term versus a bond market, where we've accessed debt in the 10- to 12-year marketplace. Although as we look at our maturity profile and you look at 2018, 2018 is a very attractive window for us to potentially layer in some debt whether that be a 7-year unsecured bond that would have a very, very low coupon, based upon what the 7-year treasury rate is today. Or you can do a 7-year convert if you wanted to. And we're going to compare those 2 and think about those things as we consider making this decision and the timing of this decision, which is also reliant upon our view of where the market is and where rates are going to go in the short term. So maybe we'll do something sooner rather than later. I mean, we could wait 3, 4, 5, 6 months as well depending on what our view of what the capital markets is over that intervening timeframe.

Douglas Linde

And there are components that go into a convertible discussion that are not easy to put your finger on an answer on, which is so what's your stock price going to be in 5 or 7 years? What's the growth rate of your stock price going to be? And do you feel -- are you getting paid fairly for that option? And what's going to happen with your dividend? And if your dividend is going to be going up because your earnings are going to be going up, how does that impact the overall coupon on the convert and what that cost of capital is? So we're dealing with sort of a pretty complex set of issues. Big picture, we're going to take out the convert. If we think interest rates are going to be at a terrific level for a long time, we're less in a rush to do that. If we think that there's a choice -- chance that rates may possibly spike up a little bit, we're probably more inclined to do something. But it matures in less than 6 months, so it's going to happen in the next 2 quarters.

Jonathan Habermann - Goldman Sachs Group Inc.

That's helpful. And then maybe Doug or Mort, just on West L.A., can you give us some thoughts in terms of where this market is coming up in your rankings as you evaluate potential new opportunities and maybe even comparing the returns you see there?

Mortimer Zuckerman

We think it's a very good market. It's very hard to get a significant position there. There are some very serious players there, and we have looked at it off and on for quite a long period of time. We analyzed that markets in various angles, and we have yet to find a way to break into it on a scale that makes sense. But we'd be very interested if you happen to know somebody who wants to sell a number of buildings there. But it's a very active local market, and we're -- we've just -- we've never been able to find something that we would like to go to on a scale that would make it worthwhile for us.

Operator

Your next call is from David Harris.

David Harris - Gleacher & Company, Inc.

We seem to be in the season of major job cuts from the banks. I mean, with regard to your comment on New York, are these not yet of a scale to have sort of an impact on the market? Or are we talking of a lag? I mean, obviously, this is something that's happened over a number of years, over a number of cycles, so we can all draw on our own experience in that regard.

Douglas Linde

So David, this is Doug. Here will be my perspective. If you believe that the cuts that are going on in the New York City investment banks are a -- going to result in those people leaving the market and finding employment in some other parts of the United States, that would lead one to think that this is sort of a structural change and then therefore, things are lagging. Our view to date has been that the type of person who wants to live and work in New York City is more mobile than an institution and that in many cases, the cuts that are occurring are really not an elimination of a job per se but a decision to change the business focus of the institution and so that those people may in fact be able to find meaningful employment at other institutions or other start-ups or other midsized firms in Midtown Manhattan or downtown Manhattan but in the metropolitan area. So it's not necessarily a 0-sum gain when those people leave and that they may in fact be going someplace else. And when you have a -- for example, Nomura, as I understand, it is moving from 550,000 square feet to 900,000 square feet of space. Presumably, they're going to be hiring people. I don't know what kind of people they're hiring, if they're research people, if they're hiring asset management people, if they're hiring structures finance people, if they're hiring investment banks, but they're going to be hiring people. Similarly with Jefferies -- and again, what we saw in 2008 to 2009 when we sort of felt the first shoe like this drop when there was a major financial panic, a lot of the smaller institutions grabbed market share, and they grabbed people share by grabbing very smart, sophisticated, well-educated people who want to live in New York City and just were able to find another alternative to where they could work.

David Harris - Gleacher & Company, Inc.

Okay. Can I just go back on the overseas market expansion and just be clear if I can with -- on one point? Is -- are you focused primarily on English-speaking cities? And so we could clearly take Paris and then Tokyo off the list.

Mortimer Zuckerman

No, not necessarily, but I think we certainly feel slightly more comfortable in English than we do in almost any other language that's spoken on the continent. And both -- it's not just the language. It's the law and the customs, and we want to build operating platforms in these markets. So I think we're going to be fairly cautious in terms of where we would enter on a large scale at the beginning.

David Harris - Gleacher & Company, Inc.

And I probably carry too much baggage with regard to London, but it's probably my views. After 15, 16 years of living here, I'd still classify it as the supreme, unchallenged global city and a city with a very sophisticated and mature property market. So my question is, is that in that context -- there's been tremendous international flows in and out of London over time -- is would it make more sense to perhaps foray into London with a partner, sovereign wealth fund, Middle Eastern money and such like, which has had a tremendous long history of involvement in a market like London? Or would you think you'd be primarily focused on looking for assets on balance sheet?

Mortimer Zuckerman

Well, we actually have taken that tack as well. I mean, we really have talked to other partners, because some of the transactions are very large in London. And I think we are a very good partner for some of these sovereign funds, and we would be -- and we already talked to them, and we would be very open to working with sovereign funds. We've done in the past, and we think it's a very good way to enter into these markets on the right scale. With regard to your point, it's absolutely valid.

Operator

Your next call is from Ross Nussbaum.

Ross Nussbaum - UBS Investment Bank

One quick question. Doug or Mort, how does your view of the interest rate environment over the next, let's call it 12 to 36 months, both on the short and long end of the curve, impact how you think about allocating capital to new investments and the required investment returns you need?

Mortimer Zuckerman

Well, of course, it has an effect. I mean, what we sort of look at is, first, the property and the overall sense of what we think the yield on the property is. And what we have tried to do, and I think we've done it well so far, is to just make sure that we are very, very well capitalized as a company under current market conditions, where we think the interest rates are very attractive for a company like us. And we sort of want to make sure that we can do without having to worry about where the capital markets will be, that we can do some major acquisitions based on what our current sort of financial strength and liquidity make possible. And so we've been very, very conservative in that sense and happily so. We even -- we felt there was a big bubble in the market, as you may remember, back 5 years ago. We sold a lot of real estate. And we've been in great financial shape, and we're still open to selling some of our buildings depending on what prices we get, obviously. But I think what we're -- sort of if we had to sort of describe the strategy, I don't think we're not going to be for financing. We just want to make sure we have the corporate capability of taking on almost any major acquisition that would come along our way if we wanted to make that purchase, that we wouldn't have to worry about the ability to get financing nor would the sellers have to worry that we would have to be able to make it subject to financing. And we think that is a major competitive advantage in trying to buy these buildings, and that's something we're -- we positioned ourself to take advantage of it, and we will continue to position ourself to take advantage of it.

Well, if there are no further questions, perhaps it would be timely just to thank you all for taking the time to listen to our sort of quarterly performance and talked again about where we think the markets are and where we think our growth is going to be. And we look forward to continuing this certainly in response to our next quarter, and I thank you all for taking the time to join up with us.

Operator

And we do have a question from the line of Steve Benyik.

Steven Benyik - Jefferies & Company, Inc.

I guess for Mike, you mentioned the $1 billion of cash following the closing of the 601 Lex loan. You mentioned the possibility of closing on a couple of construction loans. Just wondering can you give us a sense as to what the magnitude of those construction loans might be and what is assumed as a yearend cash balance in guidance.

Michael LaBelle

Well, the construction loans are on our JV developments. So it's 500 North Capitol, and it is the Annapolis Junction 6 project. So both of the requirements for those loans is very small. On our behalf, it's something like less than $50 million for those. So our -- we will build up our cash position to $1 billion. There's probably maybe less than $100 million of spend on the other development properties through the end of the year, so I would expect somewhere around $900 million by the end of the year is a good estimate.

Douglas Linde

Assuming we don't do any acquisitions.

Steven Benyik - Jefferies & Company, Inc.

Okay. And then I guess in terms of tapping the ATM, can you just talk a little bit about under what circumstances that might make the most sense. You talked about some other potential unsecured converge you could do, but will tapping the ATM be more for a larger acquisition where you'd want it to be leverage neutral?

Michael LaBelle

I mean, I think that we've been pretty pleased with our ability to use the ATM, especially in conjunction with the acquisitions that we made. We made $1.5 billion of acquisitions, so we thought it was prudent for us to go and utilize the $400 million that we put in our initial program. Given our success with that, we thought it was a good idea to put a new program up. We think it's a great tool to have, and we think that it's probably a tool we'll keep in our set on a consistent basis. Our use of it is really going to be reliant upon what we -- what our expectations are for acquisitions. We're very comfortable with our liquidity and our capital structure based on a kind of steady-state basis. But if we really see the opportunity to put more capital out, that's going to be the driver behind potentially using that some more. So as we investigate those opportunities, we will consider utilizing that ATM in line with those types of investments.

Steven Benyik - Jefferies & Company, Inc.

Okay. And then just lastly for Doug. I guess, when you look at some of the recent New York City transaction cap rates, it's at 5%, and you compare that to, again, some of the Wall Street related headwinds and to the extent that some of those firms may be the real drivers of rent growth, I guess how do you sort of look at sustainability of that lower cap rate environment and also whether you're seeing any more price sensitivity from these financial firms as it relates to they're looking at space at 250 West 55th?

Douglas Linde

So you asked a couple of different questions in there. I don't personally think that the investment banks or the universal banks have been driving rent growth in Midtown Manhattan over the past 2 to 3 years. It's really been driven by the smaller financial institutions that have been growing and by smaller firms and the hedge funds and the private equity firms and some of the non-financials that have been making moves in and around the city. The -- I think we've been pretty consistent in our view, which is we don't think there's going to be tremendous rent growth in Midtown Manhattan in the short-term, because there's just enough available space, and there's not a lot of lease expiration growth occurring. But that doesn't mean there won't be pockets of rent growth, in particular, submarkets, in particular, classes of inventory, in particular, the high-quality premier buildings in places like the Plaza District, because we have, in fact, seen pretty strong rent growth in those markets over the past couple of years. With regards to cap rate and rental rate growth, I -- we have obviously not been successful at purchasing assets in Midtown Manhattan since we purchased 510 Madison Avenue, and we have been looking. I don't believe that the purchasers of those buildings are underwriting 30% or 40% rent growth over the next 1 to 2 years. I assume what they're doing is they're underwriting 5% or 7% or 10% little spikes here and there and then getting to 40% or 50% rent growth over a 7- to 9-year period of time, which quite frankly, is probably not unrealistic. It's a question of how it's weighted. That's really the most dramatic impact in terms of what that is. And then they're looking at overall investments in the world and how they think real estate in Midtown Manhattan's going to -- is going to fare in a very volatile economic environment, and I don't think those types of the things are going to change in the short term. And so even if there is a dropoff in payrolls at Goldman Sachs and Bank of America and Merrill Lynch and Barclays and JPMorgan and the other banks, investment banks out in the city. If, in fact, the Basel rules and the other Dodd-Frank stuff sort of impacts the way they're going to be operating their businesses, I don't get a sense that, that in and itself is going to impact cap rates as much as what would happen if interest rates spike dramatically. And that said, we feel pretty comfortable that interest rates are going to be low for a period of time.

Okay. Thank you, everyone. And we will -- have a great summer, we'll talk to you in the fall.

Operator

This concludes today's Boston Properties conference call. Thank you again for attending, and have a good day.

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